Chapter 7

Foreign Aid and Foreign Direct

Investment

1.Foreign Aid
Foreign aid is one the largest sources of foreign exchange. It is defined
as the voluntary transfer of resources from one country to anther.
It includes any flow of capital to developing countries. The aid can be in
the form of a loan or a grant.
It may be in either a soft or hard loan. If repayment of the aid requires
foreign currency then it is a hard loan. If it is in the home currency then
its a soft loan. The World Bank lends in hard loans, while the loans of its
affiliates are soft loans.
Types of Foreign Aid:
Bilateral aid

Bilateral Aid is assistance given by a government directly to the

government of another country. It is when the capital flows from a
developed nation to a developing nation. These are to assist in long-term
projects to promote democracy, economic growth stability and
development.

 Multilateral aid
Multilateral Aid is assistance provided by many governments who pool funds to
international organizations like the world bank, United Nations and International
Monetary Fund that are then used to reduce poverty in developing nations .
Project aid
Project Aid is one of the types of foreign aid where the funds are used to finance a
particular project, such as a school or a hospital.
Military aid
Military aid (which was about $15 billion in 2011) is never altruistic and such aid
usually requires said nation to either buy arms or defense contracts directly from
the USA or in other cases just simplifies the process by having the federal
government just buy the arms itself and ship them over on military transport.
Tied aid
Tied Aid is one of the types of foreign aid that must be spent in the country
providing the aid (the donor country) or in a group of selected countries. A
developed country will provide a bilateral loan or grant to a developing country,
but mandate that the money be spent on goods or services produced in the
selected country.

Perception donors and recipient countries

foreign

Bangladesh receives the

assistance from both the
multilateral and bilateral donors. Three development partners or
donors World Bank-International Development Agency (IDA), Asian
Development Bank (ADB) and Japanese government provide 52.71
percent
of the total disbursed aid.
World
Bank:
The World Bank is the largest as well as the most influential lender
to the country. It is the coordinator of aid donors in Bangladesh. In the
1970s, during the initial phase of its operations, the World Bank
concentrated largely on project lending for achieving food selfsufficiency, mobilizing domestic resources, improving social
indicators, and enhancing project implementation.
During the current decade, it focuses on human resource
development, environmental management and gender equity,
integrated rural advancement and private-sector growth by
strengthening the financial sector and promoting private investment
in energy, infrastructure, manufacturing and services. The biggest
multilateral donor is the World Bank, which provided 23.11 percent of
the total aid in recent year.

ADB (Asian Development Bank):

ADB ranked second with a contribution of 16.09 percent in
recent year. The principal focus of ADB lending was in
agriculture, energy, transport and education. Multilateral
donors provide these amounts of aid almost entirely in the
form of loan.

Japan Government:
Japan is the largest bilateral donor to Bangladesh and
accounts for a sizable portion (about 14 percent through
FY 2008) of the countrys foreign assistance (GOB 2009).
Japan implements its aid programs through a number of
government agenciesthe embassy, JICA, Japan Bank for
International Agencies and Japan External Trade
Organization. The stated objective of the Japanese
country assistance program is to support Bangladesh to
achieve economic growth, social development and
human security (including health, education, gender
equity and environmental protection) and governance.

Foreign Direct Investment

Foreign direct investment is the direct investment into a
business or sector by a company or individual from
another country, differing from portfolio investment,
which is a more indirect investment into another countrys
economy by means of financial instruments such as stocks
and bonds.
FDI is the sum of equity capital other long-term capital,
and short-term capital as shown the balance of payments.
FDI is one example of international factors movement.

Advantage of FDI in host country:

It can stimulate the economic development of the
country in which the investment is made, creating both
benefits for local industry and a more conducive
environment for the investor.
It will usually create jobs and increase employment in
the target country.
It will enable resource transfer, and other exchanges of
knowledge whereby different countries are given access to
new skills and technologies.
The equipment and facilities provided by the investor
can increase the productivity of the workforce in the target
country.

Disadvantage or demerits of FDI:

Foreign direct investment can sometimes hinder domestic
investment, as it focuses resources elsewhere.
Occasionally as a result of foreign direct investment exchange
rates will be affected, to the advantage of one country and the
detriment of the other.
Foreign direct investment may be capital-intensive from the
investors point of view, and therefore sometimes high-risk or
economically non-viable.
The rules governing foreign direct investment and exchange
rates may negatively affect the investing country.
Investment in certain areas is banned in foreign markets,
meaning that an inviting opportunity may be impossible to
pursue.

Impact of FDI:
FDI has a positive effect on economic growth through:
transfer of new technologies and know-how
formation of human resources
integration in global market
increase competition and firms development and recognition
Empirically variety of studies considers that FDI generate economic growth in
countries. However, there is also evidence that FDI is a source of negative

effect:
Foreign direct investment is very risky since the political issues in several
countries can instantly change. Most of the risk factors that you will experience are
extremely high.
Investing in some of the foreign countries is more expensive compared to goods
exportation. If you are an investor, it is very imperative that you prepare enough
money for setting up your operations.
There are also cases that political changes will lead to expropriation wherein it is
a kind of scenario that the government will control your assets and property.

Flow of FDI in Bangladesh:

FDI in Bangladesh increased by 1700
USD Million in 2015 fiscal year.
Foreign direct investment in BD
averaged 916.07 USD Million from
2012 until 2015, reaching an all time
high of 1726 USD Million in 2013 and
a record low of 276 USD Million in
2004. FDI in BD is reported by the
Bangladesh Bank (last updated on
August of 2016).

Flow of FDI in BD
1726

1800
1600

1700
1432

1400

1191

1200
1000
800

913
775

600
400
200
0

2010

2012

2014

0
2016 0

Flow of Foreign Aid in BD:

A total of Foreign aid under the
program for fiscal year 2013-14
5844.217million US dollar have been
signed. of these grant and loan in
the amount of 5346.400 million US
and 497.818 million US dollar.

Multinational corporation (MNCs)

A multinational corporation is an enterprise that on a global
basis and committing assets to operation or subsidiaries in
foreign countries
According to P Kotler,
A MNCs is a firm that operates in more than one country and
captures R&D production, logistical, marketing and financial
advantage in its costs and reputation that are not available to
purely domestic competition.
MNCs are also called a global or international corporation.
The example of MNCs may include the Coca-Cola, Apple,
Microsoft, and Samsung etc.

Positive and negative effect of MNCs:

MNCs offer advantages to host country as well as home country
Host country:
MNCs help increase the investment level the host country and thereby bring rapid
industrial growth, income and employment opportunity.
MNCs act as agent for the transfer of technology to developing countries thus
facilitating such countries to modernize their industries.
MNCs accelerate industrial growth in host country through collaboration of
subsidiaries and branches.
It enables to raise their exports and decline imports by increasing domestic
production.
It also stimulate domestic enterprise because to support their own operations
indirectly.

 Home country
MNCs provide co-operation to poor or developing countries to
develop their industries. The home countries participate in such
international co-operation which beneficial to all countries.
It ensure optimum utilization of natural and others resources are
available in their home nations. This is possible due to their
worldwide business content.
It collect fund from the enterprise of other countries in the form of
fees, royalty, and service charge. This money is taken to the countries
of their origin.

Negative effect of MNCs

MNCs harm the host countries as well as home countries.
Important demerits of MNCs are as follow:
MNCs technology is designed for worldwide profit maximization
not development needs for poor countries. These technology supply
may be costly, obsolete or out-dated.
Through their power and flexibility, MNCs can undermine national
economic autonomy and their activities may be inimical to the
national interest of particular countries.
It undermines local cultures and tradition; change the consumption
habit of their benefit against the long term interest of the local
community.
The transfer pricing enables the MNCs to avoid taxes by
manipulating prices in case of intra-company transaction.